Roles of Fannie Mae and Freddie Mac in The Mortgage Industry

In this blog, we will cover and discuss the roles of Fannie Mae and Freddie Mac in the housing and mortgage industry. What Are Roles Of Fannie Mae And Freddie Mac? The main role of both of these mortgage giants is to provide liquidity in the mortgage markets. Dale Elenteny, a senior mortgage loan originator at Gustan Cho Associates says the following about the roles of Fannie Mae and Freddie Mac in the mortgage industry:

Fannie Mae and Freddie Mac purchase mortgages from lenders. Lenders use their warehouse line of credit to fund mortgages.

Once they fund using their warehouse line of credit, lenders need to sell the mortgages they funded on the secondary mortgage bond markets. Fannie Mae and Freddie Mac are the two largest buyers of mortgages in the secondary mortgage markets. In the following paragraphs, we will cover the roles of Fannie Mae and Freddie Mac in the housing and mortgage industries.

How Does Fannie Mae and Freddie Mac Keep Liquidity in the Housing and Mortgage Markets?

By buying mortgages from lenders, lenders can pay down their warehouse line of credit and originate and fund more mortgage loans. This is how the housing markets remain affordable and stable. Due to liquidity, lenders can offer more home loans for homebuyers with low down payments and low mortgage rates. Conventional loans are called conforming loans. This is because Fannie Mae and Freddie Mac will only purchase conventional loans that conform to their agency guidelines.

Conventional Loan Guidelines Are Set By Fannie Mae and Freddie Mac

Fannie Mae and Freddie Mac Set Standards and Agency Mortgage Guidelines On Conventional Loans. The Federal Housing Finance Agency (FHFA) is the federal agency that regulates Fannie Mae and Freddie Mac. In this article, we will discuss and cover the Roles Of Fannie Mae And Freddie Mac In The Mortgage Industry.

Mortgage Giants Fannie Mae And Freddie Mac: Government Sponsored Enterprises

Fannie Mac and Freddie Mac are called Government Sponsored Enterprises also known as GSE’s. Fannie Mae and Freddie Mac are the two giant mortgage lending institutions for conforming mortgage loans.

Most American homeowners and homebuyers have heard of Fannie Mae and Freddie Mac but do not have a grasp of what their functions and role is.

There are still many folks who ask what are the roles of Fannie Mae and Freddie Mac. In this article, we will analyze the differences between the roles of Fannie Mae And Freddie Mac.

Differences Between And Roles of Fannie Mae and Freddie Mac

The answer to What Are The Roles Of Fannie Mae And Freddie Mac is the following. When Borrowers need to qualify for Conventional Loans Fannie Mae and Freddie Mac guidelines need to be adhered to. Lenders who originate Conventional loans need to follow Fannie Mae and Freddie Mac guidelines. This is because in order for lenders to be able to sell mortgages they fund Fannie Mae and/or Freddie Mac.

Importance of Meeting Fannie Mae and/or Freddie Mac Mortgage Guidelines

Understand how Fannie Mae and Freddie Mac keep the mortgage market healthy. From making loans cheaper to supporting affordable housing, these GSEs help millions of buyers. Read this guide to see what’s next for these key players.

Both Fannie Mae and Freddie Mac will not buy Conventional Loans that do not meet their guidelines. This is why Conventional Loans are called Conforming loans. Conventional Loans need to conform to Fannie Mae and/or Freddie Mac Agency Guidelines in order for Fannie/Freddie to purchase the mortgages they fund.

What Is Fannie Mae and Freddie Mac?

Fannie Mae and Freddie Mac are private companies that are backed by the federal government. Fannie Mac and Freddie Mac is not a mortgage lender. Fannie Mae and Freddie Mac do not fund loans directly to the public consumer.

The general public has no contact with Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac’s role is to purchase the majority of home loans that are originated and funded by banks, credit unions, and institutional mortgage lenders.

Fannie and Freddie purchase loans from lenders because their role is to provide liquidity in the mortgage markets.

Providing Liquidity To Mortgage Lenders By Buying Mortgages on the Secondary Market

Can relieve the mortgage lenders from their lines of credit so the mortgage lenders can fund more conforming loans. Both Fannie Mae and Freddie Mac have mortgage guidelines where lenders need to conform to them in order for the mortgage loan to be sold to Fannie Mae and Freddie Mac. After Fannie Mae and Freddie Mac purchase conforming loans from banks, credit unions, and institutional investors, they package them up as mortgage-backed securities  (MBS) which are then sold to investors in the open market. Fannie Mae and Freddie Mac’s main objective and mission are to provide liquid access to banks, credit unions, mortgage bankers, and institutional lenders who originate and fund loans to the public.

What Is Secondary Market And How Does It Work?

When borrowers apply for a mortgage loan from ABC Mortgage Banker the mortgage banker will process and underwrite mortgage loans.

Here is the general mortgage process:

• ABC Mortgage Banker has what is called a warehouse line of credit
• They will use it to fund the mortgage loan
• We will use a case study here where ABC Mortgage Banker has a $1 million warehouse line of credit
• A warehouse line of credit is like a large credit card to be used solely for the purpose of funding mortgage loans
• ABC Mortgage Banker’s mission and goal is to use part of that $1 million warehouse line of credit temporarily to fund the mortgage loan
• Then re-sell the mortgage loan they funded back to either Fannie Mae or Freddie Mac
• In order for Fannie Mae or Freddie Mac to purchase loans from ABC Mortgage Banker originates and funds, all of the loans need to conform to Fannie Mae’s and/or Freddie Mac’s guidelines
• If ABC Mortgage Banker screws up and makes a mistake and a loan does not meet the guidelines of Fannie Mae or Freddie Mac, then Fannie Mae and/or Freddie Mac will refuse to purchase the mortgage

In this case scenario, if Fannie Mae and/or Freddie Mac refuse to buy the mortgage loan from ABC Mortgage Banker, then ABC Mortgage Banker will need to hold the loan which will tie up the $1 million warehouse line of credit.

How Do Resale Of Mortgages By Fannie Mae and Freddie Mac Work

The example below can explain the Roles Of Fannie Mae And Freddie Mac to our viewers. Once Fannie Mae and Freddie Mac purchase conforming loans from banks, credit unions, mortgage bankers, and institutional lenders Fannie and Freddie will package these loans into mortgage-backed securities to institutional investors. Institutional investors are pension funds and large money managers on Wall Street.

How The Mortgage Lenders Keep on Originating and Funding Loans

This chain of events of lenders being able to sell loans to Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac relieve the lender of their warehouse lines of credit. This is how these two mortgage giants provide liquidity for the mortgage markets. This enables lenders to reuse their lines to originate and fund more loans.

Packaging these loans as mortgage-backed securities and selling them to the secondary market to institutional investors where the investors make money from interest relieves the mortgage lenders to liquidity to generate more loans to public customers. They can start the whole cycle all over again and stimulate home purchases, refinance mortgages, and stimulate the economy.

Which Is Better? Fannie Or Freddie?

Both Fannie Mae and Freddie Mac have the same goals and objectives.

Their mission and the reason why these two Government Sponsored Enterprises ( GSEs ) were created was to do the following:

• provide capital
• market liquidity
• market stability
• market affordability to the residential mortgage markets

How Fannie Mae and Freddie Mac Were Created

The federal government launched Fannie Mae back in 1938. The Federal National Mortgage Association ( FANNIE MAE ) was created as part of the New Deal in 1938 under President Franklin Roosevelt.

The goal for the creation of the Federal National Mortgage Association was for FANNIE MAE to purchase home mortgages from private mortgage lenders.

It was also to stimulate homeownership and mortgage lending during the Great Depression. In 1970, the United States Congress created Freddie Mac. Federal Home Loan Mortgage Corporation was created to avoid Fannie Mae being a monopoly. It was also created to encourage competition and to expand the availability of residential mortgage loans.

How Does Fannie Mae And Freddie Mac Benefit The General Public?

Consumers do not have any direct contact with either Fannie Mae or Freddie Mac. However, Fannie Mae and Freddie Mac provide priceless benefits to homeowners and homebuyers. Fannie Mae and Freddie Mac make home mortgages possible by working with the thousands of banks, credit unions, mortgage bankers, and institutional mortgage lenders by providing liquidity and capital to them.

Roles of Fannie Mae and Freddie Mac in the Mortgage Industry

Knowing what Fannie Mae and Freddie Mac do is crucial when jumping into the homebuying process or analyzing housing investments. These two government-sponsored enterprises (GSEs) are the backbone of the American housing market.  They help home loans flow smoothly by buying mortgages off lenders’ books and turning them into securities.

This single move keeps money moving in the market, holds down mortgage rates, and keeps homeownership within reach for millions of Americans. This guide breaks down their history, how they operate, what they impact, and how they differ, so you see why they are still the bedrock of U.S. housing finance.

What Is the Historical Background and Establishment of Fannie Mae and Freddie Mac in the U.S. Housing Market

Fannie Mae and Freddie Mac were born in the United States during the economic and housing crises. They were created first to ease housing shortages during the Great Depression and later, in the 1970s, to add competition and stability to the market. As the economy changed, so did their missions, turning them into the purchasing and mortgage-packaging giants they are today. Their evolution has allowed them to absorb shocks during rough times, influencing how easy it is to get a mortgage and how reliable the entire housing market is.

How Fannie Mae Helped Homeownership After the Great Depression

Fannie Mae, short for Federal National Mortgage Association, started in 1938 during President Franklin D. Roosevelt’s New Deal programs. The Great Depression had caused banks to shy away from making 30-year home loans, which left many families unable to buy houses.

Fannie Mae stepped in to set up a secondary mortgage market, letting banks sell the home loans they had made. Once banks sold these loans, they had money again to make new mortgages.

At first, Fannie Mae worked as a government agency. She bought home loans that the Federal Housing Administration, or FHA, insured. Doing this encouraged banks to agree to standard lending rules and to lend to more families. Over the years, the agency grew, and in 1968, it turned into a for-profit corporation that sold stock but kept a government-sponsored label. This change allowed Fannie Mae to act more like a private company. At the same time, the federal government did not legally back its loans. Nonetheless, people and investors still felt the government would support the company, which helped Fannie Mae market its mortgage-backed securities safely.

Freddie Mac was launched in 1970 to strengthen the Secondary Mortgage Market.

Freddie Mac, officially known as the Federal Home Loan Mortgage Corporation, first appeared in 1970 through the Emergency Home Finance Act. Congress designed the agency to create healthy competition with Fannie Mae and to widen the secondary mortgage market.

At the outset, Freddie Mac targeted savings and loan associations, also known as thrifts, buying the mortgages they issued. This strategy broadened mortgage funding sources and lessened dependence on just one institution.

Like Fannie Mae, Freddie Mac acquires conforming loans—mortgages that meet set underwriting standards—then pools them into mortgage-backed securities (MBS) sold to investors around the globe. By adding Freddie Mac to the mortgage finance system, lawmakers provided extra stability during the 1970s, an era marked by fast-rising inflation and dramatic swings in interest rates. More than fifty years later, the agency still prioritizes innovative mortgage products, including offerings that support affordable housing programs, broadening its impact across the real estate market.

What Fannie Mae and Freddie Mac Actually Do in Today’s Mortgage Market

Fannie Mae and Freddie Mac mainly work as middlemen in the mortgage process. They connect mortgage lenders—like banks—with investors who want to buy mortgage-backed securities. By doing this, they keep cash flowing through the housing market, so lenders can keep making loans. The wider effect is that new cash unlocks more home sales, making loans affordable for more families and boosting the broader economy.

How Fannie Mae and Freddie Mac Provide Essential Liquidity to Mortgage Lenders Nationwide

Arguably, the most crucial function of Fannie Mae and Freddie Mac in the mortgage market is to provide liquidity, or cash, to lenders when they need it.

When banks and mortgage companies make loans, they sell those loans to the GSEs instead of keeping them on their own books. By doing this, lenders can quickly free up their funds and make additional loans, avoiding the limits imposed by bank deposits or reserve-cushion rules set by regulators.

In a common example, a lender makes a fixed-rate 30-year mortgage, hands it over to Fannie Mae or Freddie Mac, and gets cash or a GSE mortgage-backed security in exchange. The GSEs afterward pool the mortgages into MBS and back them with a government guarantee, appealing to large investors such as pension funds and insurance firms. This liquidity layer is especially crucial during recessions, keeping the mortgage market functioning and stopping a credit freeze that could freeze home purchases and sales nationwide.

Standardizing Mortgage Underwriting: How Fannie Mae and Freddie Mac Keep Lending Safe

Fannie Mae and Freddie Mac have more roles than just pumping cash into the mortgage market—they also set the rules that make lending safe and predictable. They limit the size of conforming loans, which, for 2025, is capped at $806,500 for almost all neighborhoods.

Lenders must follow detailed underwriting directives to sell loans to Fannie or Freddie. These rules specify minimum borrower credit scores, maximum debt-to-income ratios, and minimum down payments, all designed to keep broad-scale defaults in check.

The two agencies also mandate that originators gather verified documents and perform appraisals according to strict standards. These steps cut down mortgage fraud and grounded loans in realistic, sound financial assessments. The same guidelines that defend the GSEs also protect individual borrowers by creating a transparent and level playing field, adding stability to the housing market.

How Fannie Mae and Freddie Mac Shape Everyday Homebuyers and the Entire U.S. Housing Market

Fannie Mae and Freddie Mac are more than purveyors of secondary market capital—they are powerful engines that make mortgage credit available to nearly every American.

The agencies lower the borrowing cost and lighten the lending risks, encouraging builders, real estate agents, and countless other service providers.

The availability of sustainable mortgage credit helps to level the playing field, allowing families across a range of incomes to access homeownership. In turn, stronger homeownership rates bolster consumer confidence and buoy local housing markets, creating a reinforcing cycle that helps the broader U.S. economy grow.

How Fannie Mae and Freddie Mac Help Keep Mortgage Rates Low

Fannie Mae and Freddie Mac help keep mortgage rates low for American homebuyers by backing mortgage-backed securities (MBS). When they guarantee these bonds, they lower the risk for investors. Because the investors feel safer taking a chance on these loans, they’re okay with earning a smaller profit. This, in turn, means lenders can offer lower rates on conforming loans. You may not feel this, but the real magic happens in the numbers.

Without Fannie and Freddie stepping in, rates could easily be a half to a full percentage point higher. Over 30 years, that can ADD THOUSANDS to the total cost of home loans.

The small percentage difference hurts the budget of first-time buyers and families who live on moderate incomes the hardest. Cheaper rates help lower monthly payments, so these groups can afford a home and feel less stretched at the grocery store. Because the agencies are still in the market most of the time, they buffer lenders and borrowers from sudden rate spikes caused by economic changes. This stabilization doesn’t remove market jumps entirely. However, it helps keep the changes smaller, making the homebuying process less stressful.

Making Affordable Housing and Homeownership Possible with Fannie Mae and Freddie Mac Programs

Fannie Mae and Freddie Mac were created to keep housing affordable. They run programs designed for low- to moderate-income families, neighborhoods that don’t always get bank loans, and those with unique housing needs.

Fannie Mae’s HomeReady and Freddie Mac’s Home Possible mortgages do the hard work of making loans easier to get. They let buyers put down as little as 3% and they consider income from roommates or a second job, not just a formal pay stub.

Because financing can be tough to find in remote or busy urban areas, these loans open doors that would otherwise stay shut. By buying mortgages that fit these rules, Fannie Mae and Freddie Mac motivated banks to work with more kinds of buyers. This helps families build wealth and creates a ripple effect that strengthens neighborhoods. When more people own their homes, blocks get painted, lawns get tended, and property taxes help schools and parks.  

How Fannie Mae and Freddie Mac Steady the Market and Fair Schemes when Times Get Rough

Fannie Mae and Freddie Mac expect the sky to clear sooner or later. They can carry their loans, tap credit lines, and keep borrowing even if it’s more costly. Loans made during an easier market likely carry a better interest rate than chalkboard airport schemes. By borrowing and holding these loans, they zap the panic that could otherwise run through the wider economy.

The Role of Fannie Mae and Freddie Mac in the 2008 Financial Crisis and What We Learned

When the 2008 housing bubble burst, Fannie Mae and Freddie Mac lost billions because of risky subprime loans and falling home prices, foreclosures climbed, and soon the two government-sponsored enterprises (GSEs) could not cover the losses.

The Federal Housing Finance Agency (FHFA) stepped in, putting them into conservatorship in September 2008. The U.S. government then provided $187 billion to stabilize them and, in turn, the broader mortgage market.

This episode warned about the dangers of expanding into high-risk housing finance without proper controls. In the years since the crisis, lawmakers and the FHFA have enforced new capital and risk-management rules to make the GSEs less vulnerable, allowing them to continue their secondary mortgage market role without repeating past failures.

Current Status of Fannie Mae and Freddie Mac Under Conservatorship and Potential Future Reforms

By 2025, Fannie Mae and Freddie Mac still operate under the Federal Housing Finance Agency (FHFA) conservatorship, sending nearly all their earnings straight to the U.S. Treasury. The arrangement brings stability to the housing finance system. However, it also raises uncomfortable questions about whether to fully privatize the firms or let them build up more capital.

Throughout the debate, lawmakers and stakeholders have floated reforms meant to lower the risk to taxpayers without undercutting the firms’ basic market functions.

Ideas on the table include letting more private capital enter the secondary mortgage market or fine-tuning the mandates concerning affordable housing. Nothing has been finalized, yet the two companies remain the backbone of the U.S. mortgage market, still backing roughly half the home loans in the country. They’ve also been key to the recovery from the pandemic, quickly rolling out forbearance and refinancing options to keep borrowers afloat.  

Key Differences Between Fannie Mae and Freddie Mac in Their Operations Within the Mortgage Sector

Fannie Mae and Freddie Mac frequently appear in the same headlines, but behind the scenes, the two firms have unique business models that provide stability to the U.S. mortgage system.

Fannie Mae typically works with larger commercial banks. She buys conventional loans from various providers, focusing mainly on mortgages for single-family and multifamily homes.

Freddie Mac, on the other hand, leans toward smaller lenders and savings institutions and holds a slightly greater share of mortgage-related investments. Fannie Mae relies on the Desktop Underwriter program for loan decisions in day-to-day operations, while Freddie Mac uses Loan Prospector. These differing approaches foster a healthy rivalry that encourages new technologies and cost savings. Still, the two enterprises follow the same conforming loan limits and aim to stabilize the mortgage market, so their overall influence is surprisingly similar.  

Common Questions about Fannie Mae and Freddie Mac in the U.S. Housing Market

What is the role of Fannie Mae and Freddie Mac in the mortgage system?

• Fannie Mae and Freddie Mac buy home loans from lenders, bundle them into mortgage-backed securities, and sell those to investors.
• This process injects cash into the market and helps keep mortgage interest rates stable.

Are Fannie Mae and Freddie Mac Part of the Federal Government?

• Not exactly.
• They are government-sponsored enterprises, meaning they are privately owned but established by federal charter.
• Because of that charter, they receive implied government backing to help them fulfill their mission.

How do Fannie Mae and Freddie Mac Affect Mortgage Rates?

• By backing mortgage-backed securities, they lessen the risk for investors, which in turn allows lenders to offer borrowers lower interest rates.

What is The Difference Between a Conforming and a Jumbo Loan Concerning Fannie Mae and Freddie Mac?

• Conforming loans fall within Fannie Mae and Freddie Mac’s size limits and meet their rules, so the GSEs can buy them.
• Jumbo loans are bigger than those limits and carry higher rates to compensate for the extra risk.

Why Were Fannie Mae and Freddie Mac Placed Under Conservatorship?

• 2008 the mortgage crisis led to steep losses at Fannie and Freddie.
• The government intervened to stop their collapse and keep the housing market steady.

Can Individuals Get Mortgages Directly From Fannie Mae or Freddie Mac?

• No, they do not lend money to borrowers.
• Instead, they buy loans from lenders that meet their standards, and those lenders work directly with homebuyers.

How Do Fannie Mae and Freddie Mac Support Affordable Housing?

• Programs like HomeReady and Home Possible offer flexible loan options for low-income and first-time homebuyers, encouraging lenders to reach underserved neighborhoods.

What Will the Future Look Like for Fannie Mae and Freddie Mac?

• Fannie Mae and Freddie Mac’s future focus includes three big goals: ending conservatorship, attracting more private capital, and improving risk management.
• These goals are designed to keep the mortgage market safe and steady for years.

Importance of Lenders Reselling Mortgages on the Secondary Markets

If Fannie Mae and Freddie Mac did not buy mortgage loans from lenders and financial institutions, mortgage lenders will be limited on how many mortgage loans they can originate and fund due to lack of liquidity.

Fannie Mae and Freddie Mac are the two mortgage giants that make homeownership possible for millions of American families.

Due to these two government-sponsored enterprises (GSEs), almost any hard-working American can have the opportunity to qualify for a home mortgage with a low down payment and low mortgage rates at financial institutions without red tape. If you have any questions about the content in this guide or need to qualify and get pre-approved for a mortgage please contact Gustan Cho Associates at 800-999-8569. Text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.